A lost decade for UK equities? Yes – and more. Shares have trailed gilts since 1997, although the outperformance has been most marked in the 18 months to last spring, when panics over the banks – in September 2008 and March 2009 – sent global equities plunging to their lowest point in six years, with one-day falls comparable to the Wall Street Crash of 1929.
There has been a remarkable rebound, but nowhere near enough to alter the fact that the Noughties have been naught but pain for investors in shares.
So it is no surprise that UK equity performance in the last decade ranks as one of the feeblest in the last century. Annual returns on equities were around minus 1.5 per cent. Only the benighted 1970s and the turbulent years around the First World War were worse.
The picture is distorted because the dot.com boom artificially inflated share prices as the 1990s ended. With some symbolic force, the FTSE peaked at 6,950.60 on the last day of trading in 1999. It then fell, with almost equal neatness, to around half that by 2003, in the aftermath of the dot.com bubble bursting in 2000, and the 9/11 terror attacks. Following that was a fresh assault on previous records – a June 2007 peak of 6732. Having held up relatively well in the early stages of the credit crunch, the reality of the catastrophe in the banking sector cut the FTSE 100 in half again: the nadir of 3.512 was reached on 3 March this year.
Investors would have been better off putting funds into residential property (trebled since 1997) or gold (quadrupled since the turn of the millennium) or even a building society account.
By contrast, gilts returned around 2.4 per cent per annum in real terms.
Yet as a new decade opens, there are reasons for thinking that the pattern of the last few decade may be reversed.
First, there is what Goldman Sachs calls the "super cycle" in emerging markets equities – a secular shift that will sustain through the usual economic and market cycles, and may help to lift equities more widely (the London market has a high international component).
Second, there is the abiding truth that equities remain by far the best-performing asset in the long run. This has been to some extent disguised by increased share market volatility. Jumps of 2 or 3 per cent in a day are now more common and less remarked upon than they were in the 1980s or 1990s, say, possibly because of the change in technology and the rise of automated "quant" trading tactics, possibly because we live in more volatile times. Still, £100 invested in UK equities in 1945 (with income reinvested) would be worth £3,182 now, allowing for inflation. The same amount in gilts would now stand at £177, and in a deposit account £210.
Third, and most fundamental for those worried about inflation, is that gilts, like US Treasury bills and all other government securities, are just another variant of paper or "fiat" money. They are not backed by real assets. Shares, by contrast, are a claim on real assets – machinery, plant, goodwill, order books, intellectual rights and so on. In every hyperinflation of the past they have thus survived, for that crucial reason. Even index-linked gilts, which provide some protection from rising prices, will not rise as fast as the general economy, and thus will fall behind equities (in effect claims on the real economy) as the years go on.
Dubbed "the new sub prime", old assumptions about the zero-risk quality of government and quasi-government debt have been shaken because of troubles in Dubai, Greece, Spain and Ireland this year, and before in Iceland. The sheer scale of UK government borrowing – a gross issuance of £225bn in gilts this year – has led some ratings agencies to mutter about the UK. What happens when the Bank of England, the Treasury's "purchaser of first resort" via its £200bn quantitative easing programme, stops and then reverses the process, as it eventually must? It is difficult to see the slack being taken up elsewhere. There is every chance of a "gilts strike" by investors next year, with calamitous consequences for gilts values.
Mischievously, earlier this year some market analysts found some stray UK government paper that commanded an inferior credit rating to some exceptionally well-backed paper issued by the McDonald's Corporation. That was a bit of a canard, but there was an important point underlying it. Gilts are not, so to speak, the only fruit, and their security cannot be taken for granted.
It was Keynes who pointed out that investors' behaviour is not determined by where asset prices are at any given time – but where they are expected to go next. Who would bet that the next decade will repeat the last, breathtakingly unpredictable one?
Look what you could have won: Assets that shone
*When stock markets are plunging and the world is mired in economic crisis, investors need a safe place to stash their cash. No wonder that gold performed so well during the first decade of the 21st century. As the nervous have flocked towards the precious metal's safe haven qualities, its price has soared, producing an investment return of a little over 300 per cent over the past 10 years.
*Other commodities, notably oil, have performed well, too. Though the price of the black stuff has been volatile, with fluctuations predicated on short-term geopolitical issues as much as long-term supply and demand, oil would have been a banker for investors over the past 10 years. In January 2000, a barrel of oil cost around $25 – today the price is above $70 and has been as high as $147.
*Property, too, has been a winner. UK house prices may have taken a tumble over the past two years – down almost 20 per cent from peak to trough – with commercial property faring even worse, but investors in bricks and mortar are still ahead on the decade. The value of the average home in the UK is up by 117 per cent since 1 January 2000, according to Nationwide Building Society.
*Companies' shares have disappointed, but their bonds have been winners. The corporate bond sector is up by 37 per cent over the past 10 years, according to Barclays Capital, while even pedestrian gilts have managed a 35 per cent gain over the decade.
*Finally, if none of those traditional assets quite did it for you 10 years ago, investments in alternative assets would have paid off, too. Indices tracking the value of fine wine, art and even classic cars are all showing gains on the decade as a whole.Reuse content